Tax arrangement of related party transaction – Interviewing K. Kwan
Last year, the Legislative Council passed a new tax regulation requiring companies to make clear declarations on connected transactions. K. Kwan, Tax & Business Consulting Managing Partner of Landis & Kadwell Financial & Tax Consulting Ltd said that the Inland Revenue Department will obtain more information on related transactions. In addition, the tax bureau has data exchange agreements with other countries. If the company has an underreporting situation, the tax bureau may investigate and the enterprise would be fined.
The Legislative Council passed the Hong Kong Tax Amendment Regulation No. 6 in July last year, which requires qualified taxpayers to transfer pricing details to their group or company parts and apply to the tax bureau for partial documents. He explained that the relevant documents are divided into three types, namely, country documents, main documents and local documents.
Among the three documents, he explained that the country document is the largest of the three documents. If the group's overall turnover exceeds HKD 6.8 billion, the company needs to report to the tax bureau on related party transactions. If the reporting company needs to make the declaration of the country document also represents it needs to declare the subject and local documents.
However, some companies can waive the declaration. K.Kwan pointed out that under the three conditions, enterprises can waive the declaration, including both parties to the transaction as local taxpayers; the transaction will not reduce the overall tax payment; and the arrangement of related party transactions is not tax avoidance.
He explained that the amendments of the Ordinance were mainly to assist the Inland Revenue Department in collecting taxpayer’s information of related party transactions. Previously, the bureau collected taxpayer information from profits tax declaration were not so deep, the tax bureau did not know much about the corporate structure and it was not clear to its affiliates. Through this amendment, the Inland Revenue Department can obtain more information from taxpayers to understand whether there is any taxable business between companies, or whether the transfer pricing of related transactions is linked to the market price.
For the company, he pointed out that because the company needs to submit more information to the tax bureau, and the tax bureau also has data exchange agreements with other countries, if the company fails to declare, it will face the risk of investigation, and also increase the cost of document filing.
He also suggested that companies should consider re-examining their connected transactions before filing to see if there is any need to make some adjustments, thus exempting the obligation to declare this document, and recommending that companies understand their reporting obligations to their tax representatives or professional accountants, or the planning of the overall corporate structure in the coming year.